Overseas Headlines- October 1, 2018

Date: October 1, 2018

United States:

Two-Thirds of U.S. Business Economists See Recession by End-2020

Two-thirds of business economists in the U.S. expect a recession to begin by the end of 2020, while a plurality of respondents say trade policy is the greatest risk to the expansion, according to a new survey. About 10 percent see the next contraction starting in 2019, 56 percent say 2020 and 33 percent said 2021 or later, according to the Aug. 28-Sept. 17 poll of 51 forecasters issued by the National Association for Business Economics on Monday. Forty-one percent said the biggest downside risk was trade policy, followed by 18 percent of respondents citing higher interest rates and the same share saying it would be a substantial stock-market decline or volatility. “Trade issues are clearly influencing panelists’ views,” David Altig, Federal Reserve Bank of Atlanta research director and NABE’s survey chair, said in a statement with the report. The expansion that in May became the second-longest on record still looks resilient, with no major warning signs flashing and Fed officials upgrading their growth outlook for this year and next. Should it endure, the U.S. expansion would in mid-2019 become the nation’s longest ever, based on National Bureau of Economic Research figures that go back to the 1850s. Trade fears aside, economists were slightly more optimistic about the economy this year. The median forecast for inflation-adjusted gross domestic product growth rose to 2.9 percent from a 2.8 percent pace projected in the June survey. The 2019 estimate remained at 2.7 percent. On the brighter side, 33 percent of respondents said the biggest potential driver of a stronger economic performance is corporate tax reform, 27 percent cited stronger wage gains and 10 percent said stronger global growth. Business forecasters were more pessimistic than optimistic on their assessment of potential risks to expansion. Fifty-one percent said GDP growth threats are weighted to the downside, while 20 percent said they’re tilted to the upside and the rest said they’re balanced. Meantime, Fed policy makers said “risks to the economic outlook appear roughly balanced” in their statement last week, while raising their 2018 growth estimate to 3.1 percent from 2.8 percent in prior forecasts and 2019 to 2.5 percent from 2.4 percent.

Europe:

Italy Bonds Extend Drop as Investors Await EU Response to Budget

Italian bonds dropped for a third day as investors remain wary of potential friction between the populist government and European Union over the country’s budget proposal. Two-year yields led increases with investors bracing for any comments from EU leaders on the sidelines of a Eurogroup meeting in Luxembourg. Italy’s Five Star Movement-League coalition is still to lay out growth targets that formed the basis for the 2019 deficit target of 2.4 percent, which spooked investors Friday. Italian bonds have slumped since the budget deficit was announced late on Thursday, with the full proposals needing to be handed over to the European Commission for review on Oct. 15. Any rejection by the EU could cause rifts between Italy’s euroskeptics and the trade bloc, creating further market volatility. “Headlines suggesting the EU will look to reject the budget all but places the populist coalition and the EU on a potential collision course,” said Matthew Cairns, a strategist in London at Rabobank International. “That is feeding straight into BTP levels this morning.” Italy’s La Repubblica newspaper reported that there had been “rumors” that there is little that the EU can do, other than to reject the country’s proposals. European Commission Vice President Valdis Dombrovskis said Friday that Italy’s plans did not seem in line with the bloc’s stability and growth pact. Italian Deputy Premier Matteo Salvini was cited by newswire Ansa as saying that next year’s budget will bear fruit and that “the gentlemen of the spread” will understand, referring to the yield premium on the nation’s bonds over German bunds.

Asia:

China’s Manufacturers Slow in September as Trade War Worsens

Two gauges of activity in China’s manufacturing sector worsened in September, reflecting the nation’s economic slowdown and fallout from the trade war with the U.S. The official manufacturing purchasing managers index stood at 50.8 in September versus 51.3 in August, lower than the median estimate of 51.2 in a Bloomberg survey of economists. Meanwhile, the Caixin manufacturing PMI, which better reflects sentiment among smaller, private firms, declined to 50 from 50.6, the lowest since May 2017. A reading of 50 is the dividing line between expansion and contraction. The lack of progress in negotiations between Washington and Beijing over their trade rivalry means that there’s a good chance the current roster of tariffs on $250 billion of Chinese goods exported to the U.S. will grow, as President Trump has threatened. With little room for optimism on external demand, the outlook for China’s economy hinges increasingly on the effectiveness of targeted stimulus measures being rolled out this year. The gauge for new export orders in the manufacturing PMI report fell to 48, the fourth consecutive month of contraction and the lowest reading since 2016. “The further slowdown in China’s official manufacturing PMI in September reflects the intensifying impact of the U.S.-China trade war on China’s manufacturing export sector,” said Rajiv Biswas, APAC chief economist at IHS Markit in Singapore. “The near-term outlook for the Chinese manufacturing export sector remains weak, albeit the Chinese government may apply some further stimulus measures to support growth.” The official non-manufacturing PMI picked up to 54.9, signaling that domestic demand for services and construction remains strong enough to mitigate some of the external headwinds that the economy is facing, for now. “The government’s support policy will start to have an impact in the fourth quarter, which could offset the damage of the trade war,” said Gao Yuwei, a researcher at Bank of China Ltd.’s Institute of International Finance in Beijing.